Caribbean & Central America - February 2018 (ISSN 1741-4458)

It came late, but it finally happened. On 5 January El Salvador’s legislative assembly (AL) ended months of wrangling and approved a national state budget for 2018, providing what looks like a way out of the country’s recurring dispute over government spending and borrowing. The proximity of elections may have something to do with the new, apparently more collaborative spirit.

As the two largest parties in the AL, the ruling left wing Frente Farabundo Martí de Liberación Nacional (FMLN) and the right wing opposition Alianza Republicana Nacionalista (Arena) have had ample power to make things difficult for each other. They have not hesitated to use it. Of the 84 AL seats Arena has 35 and the FMLN has 31. This means that neither can command an outright majority, but depending on the alliances struck with smaller parties, each can obstruct the other. In recent years this has led to recurring deadlocks over government borrowing and spending (budget approval requires a special two-thirds majority). As a result, El Salvador fell into a partial debt default in April-May 2017.

But things are looking better for 2018. Despite fears of a new deadlock, the central government spending budget for the year, totalling US$5.52bn, was finally approved with 71 out of the AL’s total of 84 votes. The two main parties cut a budget deal and smaller parties supported it. The government’s initial proposal had been for revenues equivalent to 16.9% of GDP, and for spending equivalent to 18.8%. This implied a deficit, which would need to be funded, of 1.9% of GDP or US$554m. Arena had been insisting it would not agree to any deficit that exceeded US$350m. The government offered various austerity measures to bring the deficit down to US$310m, and then added on US$40m worth of ‘sweeteners’ – budget items that had been specifically requested by Arena (including items relating to education, health, and extra funding for the electoral tribunal). As a result, the overall deficit was limited to US$350m as the opposition party had demanded.

In terms of voting, divisions with Arena appear to have eased the way to a deal. A total of 18 Arena deputies voted in favour of the budget, six voted against, eight abstained, and three were absent. The result is that the government’s finances for the rest of this year are looking viable. The legislature authorised foreign borrowing of up to US$350m. The government can also call on a separate tranche of up to US$168m in borrowing approved last year and associated with partial pension reform. And finally, if needed, it could also issue more treasury bills (known as Letras del Tesoro Público or Letes) (see sidebar). Fitch Ratings said budget approval “should reduce short term credit risks by unlocking external financing”. Moody’s, another ratings agency, said budget approval showed the government and the opposition were able to work together.

Politics appears to be driving these changing attitudes to the budget. With congressional elections due in March this year and presidential polls following in February 2019, both main parties have realised that budget intransigence may not be a vote winner. More seriously, each are beginning to realise that they face a threat from outside challengers – new political force and leaders. Voter disillusionment with the traditional parties is running high. Nayib Bukele, the mayor of San Salvador who was expelled from the FMLN last year, has set up his own movement (Nuevas Ideas) and is leading in many opinion polls. Johnny Wright, a dissident Arena deputy who also harbours leadership ambitions, has broken ranks to create another movement, Nuestro Tiempo. Up to 40% of survey respondents say they no longer trust the two traditional parties and are looking for alternatives.

• Letes

Existing Letes debt stands at US$712m; the upper authorised limit for Letes borrowing is set at US$1.3bn.